Steve Keen's Debtwatch

I was going to write a ret­ro­spec­tive on Ben Bernanke this week, since his tenure as Fed­er­al Reserve chair­man ends soon, and it’s time to look back on his peri­od in office – as he him­self did on his pre­de­ces­sors dur­ing the Great Depres­sion. But a far more impor­tant depar­ture occurred last week: the Ital­ian econ­o­mist Pro­fes­sor Augus­to Graziani died at the age of 80.

Augus­to who, you may ask? Graziani’s name is not wide­ly known even among econ­o­mists, let alone the gen­er­al pub­lic, because he was out­side the neo­clas­si­cal main­stream – and also out­side con­ti­nen­tal Amer­i­ca, which has a pseu­do-monop­oly on fame in eco­nom­ics these days. His Wikipedia entry empha­sis­es his cur­rent obscu­ri­ty: it is a mere stub.

I’m sor­ry, I could­n’t help it: when Lar­ry Sum­mers first made his sec­u­lar stag­na­tion speech at the IMF, and the Amer­i­can eco­nom­ics tribe her­ald­ed it as if it were the great­est (and lat­est) thing since sliced bread, my irony gene went into overload—and that showed in my first post on the top­ic. The argu­ment that the West has been suf­fer­ing from sec­u­lar stag­na­tion, and that only a series of finan­cial bub­bles have kept the illu­sion of pros­per­i­ty going, has been part of non-ortho­dox eco­nom­ics for over three decades.

Blog­ging on eco­nom­ics and the ecol­o­gy are not nec­es­sar­i­ly eco­nom­ic propo­si­tions, but many of those who do it com­menced for phil­an­thropic rea­sons, rather than finan­cial. One of the plea­sures of blog­ging for me has been meet­ing such peo­ple, and one of my favourites is Nicole Foss, who main­tains the Auto­mat­ic Earth site.

Nicole has just released a new 4 hour video pre­sen­ta­tion enti­tled Fac­ing the Future, co-pre­sent­ed with Lau­rence Boomert and avail­able from the Auto­mat­ic Earth Store. If you’re look­ing for a thought pro­vok­ing gift, or some­thing to stim­u­late your own brain cells over the Fes­tive Sea­son, con­sid­er pur­chas­ing Nicole’s video and help­ing keep the Auto­mat­ic Earth oper­at­ing in 2014.

The fol­low­ing short inter­view has been post­ed on the “Eco­nom­ics in Debate” web­site in The Nether­lands.

“Keen then goes on to assert that lend­ing is, by def­i­n­i­tion (at least as I under­stand it), an addi­tion to aggre­gate demand. I guess I don’t get that at all. If I decide to cut back on my spend­ing and stash the funds in a bank, which lends them out to some­one else, this doesn’t have to rep­re­sent a net increase in demand. Yes, in some (many) cas­es lend­ing is asso­ci­at­ed with high­er demand, because resources are being trans­ferred to peo­ple with a high­er propen­si­ty to spend; but Keen seems to be say­ing some­thing else, and I’m not sure what. I think it has some­thing to do with the notion that cre­at­ing mon­ey = cre­at­ing demand, but again that isn’t right in any mod­el I under­stand.” (Min­sky and Method­ol­o­gy (Wonk­ish), March 27, 2012)

Last week I vis­it­ed the stu­dents who have start­ed the Post Crash Eco­nom­ics Soci­ety at Man­ches­ter Uni­ver­si­ty, and took part in a debate on the top­ic of “Should (and could) eco­nom­ics have pre­dict­ed the eco­nom­ic cri­sis?” with Peter Backus. The soci­ety will release a video of the talk at some point, but in the mean­time here is my pre­sen­ta­tion.

Eight years ago, in Decem­ber 2005, I began warn­ing of an impend­ing eco­nom­ic cri­sis that would com­mence when the rate of growth of pri­vate debt start­ed to fall. My warn­ings hit a pop­u­lar chord: jour­nal­ists through­out the world picked it up and pub­li­cised my views – as well as sim­i­lar argu­ments from Nouriel Roubi­ni, Dean Bak­er, Ann Pet­ti­for, Michael Hud­son, Wynne God­ley, and a few oth­ers.

But our argu­ments were ignored by the eco­nom­ics pro­fes­sion because, accord­ing to main­stream eco­nom­ic the­o­ry, pri­vate debt should have no impact on aggre­gate demand. As Bernanke put it, lend­ing sim­ply trans­fers spend­ing pow­er from lender to bor­row­er, and “pure redis­tri­b­u­tions should have no sig­nif­i­cant macro-eco­nom­ic effects” (Bernanke, Essays on the Great Depres­sion, p. 24).

In the intro­duc­tion to last week’s post on my blog I append­ed the state­ment “Health warn­ing: con­tains sub­stan­tial por­tions of irony. May exceed your dai­ly allowance”. Judg­ing from the com­ments onBusi­ness Spec­ta­tor, that was indeed the case for some read­ers. So I’ve eschewed irony in this week’s post.

Much of the irony last week was in this sen­tence – and the links gave the clue that my tongue was plant­ed firm­ly in my cheek:

“Now, as any well trained econ­o­mist knows, it’s a mat­ter of sim­ple log­ic that what hap­pens to pri­vate debt is irrel­e­vant to macro­eco­nom­ics most of the time, because “debt is one per­son­’s lia­bil­i­ty, but anoth­er per­son­’s asset.”

Guest post by Geoff Davies*

Read­ers of this blog will have encoun­tered the idea that near-equi­lib­ri­um neo­clas­si­cal eco­nom­ic the­o­ry is irrel­e­vant to dynam­ic, far-from-equi­lib­ri­um, real mod­ern economies, and that the body of the­o­ry built around the neo­clas­si­cal assump­tions is full of incon­sis­ten­cies.  You will also be famil­iar with the idea that mon­ey and debt play cen­tral, dynam­ic roles in mod­ern economies.

I was invit­ed to give a speech on that top­ic to the Sec­ond Meet­ing of Min­is­ters of Finance of the CELAC in Quito, Ecuador today (Novem­ber 29 2013). In it I out­lined Key­nes’s Ban­cor pro­pos­al from Bret­ton Woods, explained why White’s plan was adopt­ed instead, sup­port­ed the pro­pos­al by Zhou Xiaochuan, the Gov­er­nor of the Cen­tral Bank of Chi­na, to insti­tute Key­nes’s scheme, and pro­posed that Latin Amer­i­ca could try a region­al ver­sion of the same via the Bank of the South.